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Whole Foods Market can't get a break.
First, it's a small fish, and the sharks at grocery chains such as Safeway (SWY, news, msgs) and Kroger (KR, news, msgs) start stealing Whole Foods' (WFMI, news, msgs) business by adding natural-foods sections to their stores.
Investor fears about this competition have helped knock 40% off Whole Foods stock since last fall.
Then, it's a budding monopoly, or so says the Federal Trade Commission, which contends Whole Foods doesn't face that much competition from the mainstream grocery stores. The FTC made that case in saying Whole Foods shouldn't be allowed to buy Wild Oats Markets (OATS, news, msgs), another organic-grocery player, because that would give Whole Foods too much power in this little corner of the retail world.
The problem for Whole Foods is that purchasing Wild Oats was a big piece of its strategy to grab market share and combat competition from the mainstream grocery chains -- you know, the competition that supposedly doesn't exist. That's why news of the FTC's desire to block the merger shaved an additional 7% off Whole Foods' stock price last week.
The company's shares are down 11% since March, when I suggested they were a buy, but I think the new confusion surrounding the stock makes it even more of a compelling contrarian play.
Here's why: Simple logic suggests one of these scenarios is wrong. Either Whole Foods is doing too good a job fending off the big chains, or it's not doing a good enough job and thus should be allowed to eat up Wild Oats. Either way, the long-term growth prospects for the stock look bright because it is still relatively small and has lots of room to build on its popular brand.
An 'unusual' case
"I'm puzzled by the whole thing," says Alden Atkins, a lawyer with Vinson & Elkins, who represents Whole Foods against the FTC. "They have defined a product market that is extremely narrow -- indeed, I would say contrived -- so that it is limited to these two companies."Other antitrust attorneys, including one who has worked in the supermarket space, are scratching their heads, too.
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"This is a little unusual and a bit aggressive," says Andrew Berg, who works with Washington, D.C., law firm King & Spalding and has successfully defended several supermarket chains against antitrust actions that challenged mergers. "It is a bit of a departure in terms of the agency's enforcement policies."
Both lawyers think there is enough of a product overlap between mainstream supermarket chains and Whole Foods -- and enough competition -- that the FTC will have a hard time making its case before a judge.
- Video: A new Whole Foods superstore
"There is intense competition out there, and it is getting more and more intense every day, even to the point of them remodeling to look like us," asserts Whole Foods spokeswoman Kate Lowery. "That's a fact, so that's why we are going to challenge this decision."
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